Negotiable Instruments Act
Frequently Asked Questions on Negotiable Instruments Act
Ans. Origin of Negotiable Instruments :- In ancient times, the routes along which vast commerce was carried on were insecure, and merchants carrying coins were usually robbed of their wealth by roving pirates of sea, and by marauding robbers on land. In the course of some centuries there came into existence an idea of exchange, whereby Letters of Credit, generally called Bills of Exchange from a merchant of one country to his debtor who is a merchant of another country, were issued, requiring the debt to be paid to a third person who carried the letter of credit to the place where the debtor resided.
A bill of exchange was thus originally an order to pay a trade-debt, and a system of such bills afforded a convenient and facile way for the payments of debts in one country due to a person in another, without the danger of encumbrance of carrying money from one place to another.
The law relating to the negotiable instruments has developed out of customs and usages of the mercantile world in general. Therefore, although in details this branch of law differs in different countries, the general outline of the law is the same in almost all the countries.
The position in India was this that before the passing of the Negotiable Instruments Act of 1881, the English Bill of Exchange Act and Law relating to promissory notes (Statutes of William III C 17 and 3 and 4 Anne, C 8), Acts VI of 1840 and V of 1886 of the Governor General in Council were in force in India.
The Negotiable Instruments Act of 1881 was passed on the basis of a Bill drafted by the Law Commission in 1866, which was based on the Principles of English Law Merchant. Prior to the passing of this Act, where the parties were Europeans, the English law relating to negotiable instruments was applied to them, where the parties were Hindus or Mohammadans their personal law governed the relations between them. But where the analogy between the native Hundies and the English Bills of Exchange was complete, and there was absence of proof of any special usage, the English law was held to apply.
Ans. This Act applies and extends to the whole of India except the State of Jammu and Kashmir. The Act merely regulates the issue and negotiation of bills, notes and cheques, but does not provide for the transmission of rights in such instrument by operation of law or by transfer inter vivos. Therefore, it is not exhaustive of all matters relating to Negotiable Instruments. This Act does not affect the provisions of Section 25 of the Indian Paper Currency Act, 1882. Section 25 of the Indian Paper Currency Act prohibits private persons from issuing any instrument which amounts to an unconditional promise to pay a certain sum of money to bearer on demand.
The Negotiable Instruments Act is based on the principles of English Law and where no special considerations arise with reference to Indian circumstances. Courts are justified in construing statute conformable to provisions of English Law which follows the general commercial law of the world. A.I.R. 1919 Mad. 179 (182) D.B.
The Privy Council also has expressed a similar view.
There are certain differences between the English Act and the Indian Act, which preceded the former by a year. But substantially the two Acts correspond. Both have been based on the law developed by the English Courts as a part of the law-merchant, which the common law originally received on the basis of what was proved to Court to be the custom of the European business- men in their dealings but which eventually, under the name of the law merchant was integrated with and became a part of the common law. Both were based on the English decisions and hence these and later decisions of either country are commonly cited and relied upon A.I.R. 1944 P.C. 58 (60).
The Negotiable Instruments Act was prima facie intended to lay down the whole law regarding cheques, bills of exchange and promissory notes.
Act is not Exhaustive : Negotiable Instruments Act cannot be considered to be exhaustive of all matters relating to negotiable instruments. This Act primarily deals with pronotes, cheques and bill of exchange. Moreover Act, merely takes care of matter relating to issuance, negotiation of bills and notes and does not touch their assignment and devolution of rights under those instruments.
Ans. What is Negotiable Instrument : "A negotiable instrument is one, the property in which is acquired by one who takes it bona fide and for value, notwithstanding any defects of title in the person from whom he took it; from which it follows, that an instrument cannot be negotiable unless it is such and in such a state that the true owner can transfer the contract or engagement contained therein by simple delivery of the instrument". The latter part of this definition is very important. It means that the instrument must be complete at the time of the transfer.
In short a negotiable instrument has three characteristics which differentiate it from an ordinary chattel. They are :-
(a) the property in the negotiable instruments passes to the holder by mere delivery. It is the ownership, i.e., the right of retaining it as against the previous owner that passes and not mere possession. In the case of chattels nobody can claim ownership over a thing as against its rightful owner.
(b) The holder in due course is not affected by any defects of title on the part of transferor. This is not so in the case of chattels.
(c) The holder can sue upon them in his own name.
Section 13 of Act defines it as under :-"Negotiable instrument". - [(1) A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer.
Explanation (i). - A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words, prohibiting transfer or indicating an intention that it shall not be transferable. Explanation (ii). - A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation (iii). - Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.] [(2) A negotiable instrument may be payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees].
Ans. Promissory Note : Section 4 of Negotiable Instruments Act, 1881 defines the term `Promissory Note' as :-
"A `promissory note' is an instrument in writing (not being a bank- note or a currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument."
Essentials of Promissory Note : Following are essentials of promissory note :-
(i) It should contain an agreement for payment of money and money only.
(ii) The agreement must amount to an undertaking of promise and such an undertaking must be unconditional.
(iii) The sum payable must be certain.
(iv) The instrument must be signed by the maker of the instrument.
(v) The money must be payable to or the order of certain person or to the bearer of the instrument.
(vi) It should not be a blank-note or a currency note.
In Bachan Singh v. Ram Avadh, AIR 1949 All. 431, it was observed that there must be an express undertaking upon the face of instrument to pay money before it can be held to be a promissory note. A mere implied undertaking will not do. In Bal Mukund v. Munna Lal Ranji Lal, AIR 1970 P&H 516, it was observed that before a document be treated as promissory note it should be promissory note both in form and in intent. If indebtedness is acknowledged in a document for a defined sum of money, payable "on demand" that is enough to make the document a promissory note and the document need not necessarily say that debtor promises to repay the amount.
Ans. Section 5 of Negotiable Instruments Act provides :-
"Bill of exchange". - A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.
A promise or order to pay is not "conditional" within the meaning of this section and Section 4, by reason of time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be certain.
The sum payable may be "certain", within the meaning of this section and Section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that on default of payment of an installment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made, be a "certain person", within the meaning of this section and Section 4, although he is mis-named or designated by description only.
Chief features of bill of exchange - The chief features of a bill of exchange, which distinguish it from other instruments, are :-
(i) its negotiability or quality of assignment which is inherent in all bills made payable to C.D. or `bearer' or to order of the payee, in the former of which cases it will pass like a bank note by delivery, whilst in the latter it requires the endorsement of the payee to make it negotiable;
(ii) that a consideration of the bill will be presumed until the contrary appears;
(iii) that it must be for payment of money;
(iv) that the payment must be unconditional or absolute;
(v) certainty as to the person, order to pay.
Distinction between bill of exchange and promissory note - (i) In a bill of exchange there are three parties to be specified, i.e., drawer, drawee, and payee; though any two out of these three capacities may be filled by one and the same person. In a promissory note, there are only two parties, the maker and the payee. (ii) A promissory note cannot be made payable to the maker himself, but in a bill of exchange, the drawer and payee may be the same person. (iii) In a promissory note there is an unconditional promise by the drawer to pay a certain sum to the payee; in a bill of exchange, there is an unconditional order to a drawee, to comply with the drawer's direction as to payment.
Ans. Section 6 of Negotiable Instruments Act provides "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand."
So Section 6 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Cheque is bill of exchange drawn in special manner and negotiable. Mere fact that date of payment of cheque is postponed to future date, does not make cheque payable "otherwise than on demand" it is payable on demand after due date. Consequently holder in due course of cheque without notice of any defect is entitled from drawer. From definition under Section 6 it is clear that the touchstone by which a cheque is tested is that it must be payable instantly on demand.
Cheque and Bill of Exchange distinguished - In many respects they resemble even then there are some differences between them :
(1) A cheque requires no acceptance by the drawee before the payment whereas a bill of exchange must be accepted by the drawee before he can be made liable upon it.
(2) A cheque is payable immediately on demand without any days of grace but a bill of exchange is entitled to three days grace.
(3) In case of a cheque the drawee is always a banker but in case of a bill the drawee may be any person including a banker.
(4) The drawer of a cheque is discharged by delay of the holder in presenting it for payment, unless, through the delay the position of the drawer has been insured by the failure of the bank. In the case of a bill of exchange it must be duly presented for payment or otherwise the drawer will be discharged.
(5) Notice of dishonour is not necessary in the case of a cheque when it is not met but when a bill of exchange dishonoured by non-payment, notice of dishonour is necessary.
A cheque is a peculiar sort of instrument in many ways resembling a bill of exchange, but in some entirely different way. In the ordinary course, it is never accepted. It is not intended for circulation, it is given for immediate payment, it is not entitled to days of grace. In addition, a cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill of demand. A bill is dishonoured by non- acceptance, this is not so in the case of a cheque, because the holder of a cheque, as between himself and the drawer has no right to require acceptance. A.I.R. 1944 P.C. 58 (60).
Ans. Drawer. - The maker of a bill of exchange or cheque is called drawer (Section 7). The drawer must sign either personally or through an agent : Any person can be a drawer. Even those persons who are incompetent to contract can draw bills and cheques but they incur no liability to holder.
Drawee. - The person directed in a bill or cheque, to pay is called the drawee (Section 7). It is ordinarily understood that the drawee has funds of the drawer and latter directs the former by means of a bill or cheque to make payment on his behalf out of the fund held by him.
Drawee in case of need. - When in the bill or in any endorsement thereon the name of the person is given in addition to the drawee to be resorted to in case of need, such person is also called "a drawee is case of need" (Section 7). Such person is also called "a referee in case of need" under English law. Under Indian law a bill cannot be said to be dishonoured unless and until it is also dishonoured by the `drawee in case of need'. The holder therefore is bound to present the bill to the `drawee in case of need.' But under English law a resort to the `referee in case of need' is optional to the holder. According to English law a bill must be protested or noted for protest before it can be presented to the `referee in case of need'. But under Indian law a `drawee in case of need' may accept and pay the bill without a previous protest.
Ans. Holder. - The holder of a promissory note, a bill of exchange, or a cheque means any person entitled in his own name to the "possession thereof and to receive or recover the amount due thereon from the parties thereto."
Where the promissory note, bill or cheque is lost or destroyed its holder is the person so entitled at the time of such loss or destruction. (Section 8).
The essential requisites of a holder of a promissory note, bill of exchange or cheque means any person who is entitled in his own name; firstly, to possess the instrument, secondly, to receive the amount thereon and thirdly, in alternative to recover the amount so due from the parties to the instrument.
Who are holders ?
(1) A principal whose name has been disclosed on a negotiable instrument as holder even though the instrument is executed in the name of his agent or him.
(2) Where a promissory note is written in the name of a partner of a firm, that firm can very well institute a suit in the name of the firm, the reason being that when a partner is holder, the firm naturally becomes a holder, because it is not a separate entity other than the partner.
(3) Where the negotiable instrument is bearer in that case any person in possession thereof is the holder.
(4) A principal on whose behalf a pronote is endorsed in blank is delivered to his agent even though his name does not appear thereon is a holder of the instrument
(5) In case of death of a holder of the negotiable instrument, the property therein in natural course of events passes on to the heirs of the deceased holder and then they become the holders of the instrument.
(6) The endorsee of a cheque also enjoys the knowledge of becoming a holder.
Persons who are not holders. First of all, a thief or a finder of a bill of exchange is not a holder thereof. Secondly, a person who obtains a forged instrument is not a holder thereof. The word "entitled" used in Section 8 shows that the title of the person who claims as holder must be acquired in lawful manner. Thirdly, the endorsee of a bill of exchange endorsed for collection only, is not a holder.
Ans. Section 9 of Negotiable Instruments Act defines "Holder in due course" as :- "Holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if [payable to order], before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
A person claiming to be a "holder in due course" must prove :
1. That on payment of a valuable consideration he became (i) the possessor of the negotiable instrument if payable to bearer, or (ii) the payee or the indorsee thereof, if payable to order.
2. That he became the possessor before the amount due under the instrument became actually payable.
3. That he became the possessor without having sufficient cause to believe that any defect existed in the title of the transferee from whom he delivered his title.
In Sukhanraj Khimraja v. N. Rajagopalan (1989) ILW 401 it was observed that plaintiff was fully aware that the cheque had been dishonoured and the endorsement in his favour was only after it was returned by the bank therefore it had lost its negotiability. Hence he cannot be a holder in due course. In order that a person can be called a holder in due course, he must show :-(i) that he is the holder of the negotiable instrument,
(ii) he has obtained it for consideration,
(iii) he has obtained it before the maturity of the negotiable instrument, and
(iv) that he has obtained the negotiable instrument in good faith.
(i) He must receive the Negotiable Instruments as a holder - According to Section 9, a person taking the negotiable instrument may be either the payee or he became the possessor when the negotiable instrument was payable to bearer, i.e., the negotiable instrument must have been voluntarily delivered to him, or he may be the indorsee thereof, if the negotiable instrument was payable to order. (ii) He must obtain it for consideration - A holder in due course must have obtained the instrument for consideration. The consideration must also be lawful. If a person takes a negotiable instrument without consideration or where the consideration is unlawful he cannot be called a holder in due course. (iii) He must receive the negotiable instrument before its maturity - Section 9 requires that to be a holder in due course a person must take the negotiable instrument "before the amount due thereon became payable." For example, if the date of maturity of a negotiable instrument is 1st March, and a person takes the instrument on 1st March or thereafter, he cannot be said to be a holder in due course as he did not receive the negotiable instrument before its maturity. Section 59 of the Negotiable Instruments Act also provides that a person taking a negotiable instrument after its maturity has the rights thereon of a transferor. It means that a person taking an instrument after maturity will not be a holder in due course and will not be capable of having a better title than that of the transferor. (iv) He must take the negotiable instrument in good faith - Our Act does not use the term `good faith' but instead says that to be holder in due course, a person must take the negotiable instrument "without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title." The condition requires that he should act in good faith and with reasonable caution. (V. Ponappa v. C.S. Bank, AIR 1991 SC 441). It means that a person must take the negotiable instrument with an honest belief that the title of the transferor is a good one and, moreover, there should be nothing which could arouse a suspicion in his mind that the title of the transferor is defective. Rights and powers `of holder in due course' - (1) A holder in due course has all the rights and powers of a holder and in addition holds the bill free from any personal defect of title of prior parties, as well as from more personal defences available to prior parties among themselves and may enforce payment against all parties liable on the bill. (24 Bom. 65). (2) The holder in due course of a promissory note can recover the amount of promissory note from the maker and the payee, irrespective of the their respective liability as between themselves. (3) A party to a suit cannot in a suit on it by a holder in due course set-up a defence that there was consideration for the execution of the note. (4) Where the payee of the pronote executed by two persons jointly, agrees to relinquish his claim against one of the executants, the assignee of the note who takes with the knowledge of this arrangement acquires no better title than the payee, that is, his assignor, had. He is not a holder in due course and can therefore enforce the instrument only against the executant and the claim which was not relinquished by the assignor.
Ans. Section 10 of Negotiable Instruments Act provides :-
"Payment in due course" means payments in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of amount therein mentioned."
In P.M. Dass v. Central Bank of India, AIR 1978 Cal. 55, it was observed that where a bank makes payment in accordance with apparent tenor of the instrument in good faith without negligence under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment, payment is said to be done in due course.
"Payment in due course" within section 10 means payment made not only honestly but also without negligence, although no straight jacket formula can be laid down to cover each case of negligence of a banker and question of negligence requires to be decided in facts and circumstances of each case. (1993) 1 SCJ 45.
Protection when it is a payment in due course
There are certain provisions in the Negotiable Instruments Act which grant protection to the person making the payment in due course. Some of such provision are being mentioned hereunder :
(i) According to Section 82(c) the maker, acceptor or indorser respectively of a negotiable instrument are discharged from liability thereon to all parties thereto by making the payment in due course of the amount due thereon.
(ii) Section 85(1) grants protection to the drawee bank when it makes payment in due course of a cheque where the payee's indorsement is forged. According to this provision where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
(iii) Section 85(2) also grants protection to the drawee bank by declaring that a bank is discharged by making payment in due course to the bearer thereof, of a cheque which is originally payable to bearer, notwithstanding the fact that there is any indorsement thereon, and also notwithstanding the fact that such indorsement purports to restrict, or exclude further negotiation.
(iv) Section 89 grants protection to the person making the payment in due course of an instrument which has been materially altered, but the alteration made thereon is not apparent. Although by any material alteration, the instrument is rendered void, but if the alteration cannot be apparently discovered, the person making the payment of such instrument is discharged from liability, and such payment cannot be questioned on the ground that the instrument was an altered one.
(v) Section 128 grants protection to the drawee bank, which makes the payment in due course of a crossed cheque. Even if there is something wrong with the title of the person receiving the payment through a collecting bank, the drawee or the paying bank cannot be made liable, if the payment is in due course.
Ans. Section 11 of Negotiable Instruments Act provides :-
"A Promissory note, Bill of exchange or a cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument."
Where a promissory note reciting that both parties belong to India and are temporarily in Singapore, it being an instrument drawn on person resident in India is an inland instrument as defined under Section 11 (AIR 1976 Mad. 254). Section 12 of the Act provides that "Any such instrument not so drawn, made or made payable, shall be deemed to be a foreign instrument."
Ans. The negotiation of an instrument should be distinguished from transfer by assignment. When a person transfers his right to receive the payment of a debt, that is called `assignment of the debt'. As for example, where the holder of a Life Insurance Policy transfers the right to receive the payment to another person, that is nothing but assignment. Similarly, when the holder of a bill, note or cheque, transfers the same to another, in essence, he gives his right of receipt of payment of the instrument to the transferee. Thus, in both, `negotiation' and `assignment', the element of transfer of right to receipt of payment of a debt is involved. The rights which the transferee of an instrument by negotiation acquires, are substantially superior to those of an assignee.
An instrument payable to bearer can be negotiated by simple delivery. The person to whom the instrument is delivered becomes the holder of the same. Though delivery is simple is an important formality for without it, no possessor is constituted as the holder of the instrument. A person who steals or finds somewhere a bearer instrument is not the holder of the same, as it has not been delivered to him although if he dellivers the same to another person, that person becomes the holder.
Subject to the provisions of Section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiabel by delivery thereof.
It is to be noted that a promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event, is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens. This is what is called "negotition by delivery".
An instrument payable to order is negotiated by indorsement and delivery. Thus, endorsement requires two things, i.e., the holder should endorse it and then deliver to the endorsee.
There is difference between negotiability and assignability as the negotiation of an instrument should be distinguished from transfer by assignment. When a person transfers his right to receive the payment of a debt, that is called `assignment of the debt'. Where, for example, the holder of a lifetime Insurance policy transfers the right to receive the payment to another person, that is an assignment. When the holder of a bill, note or cheque, transfers the same to another, he, in essence, gives his right to receive the payment of the instrument to the transferee. Thus, in both `negotiation' and `assignment' there is the transfer of the right to receive the payment of a debt. But, the similarity ends there, for the rights which the transferee of an instrument, by negotiation, acquires, are substantialy superior to those of an assignee.
Ans. An instrument payable to order is negotiated by indorsement and delivery. Thus indorsement requires two formalities. First, the holdeer should indorse it and then deliver it to his indorsee. Indorsement is made by signing the name of indorser, usually on the back of instrument. An indorsement is complete by delivery of instrument to indorsee. Every contract on a bill whether it be the drawer's, the acceptor's or an indorser's is incomplete and revocable untill delivery of instrument in order to give effect thereto, so indorsement completed by delivery. Indorsement must be genuine and not forged.
Indorsements of negotiable instruments may be divided into the following classes :-
1. Blanks or General Indorsements - It is one where indorser simply signs his name on an instrument without specifying any indorsee to whom he wants to transfer his rights in the instrument. This makes the instrument payable to bearer and the property therein is transferred by mere delivery.
2. Special indorsement or indorsement in full - In such indorsement the payee writes the name of the person in whose favour he indorses, above his own signature. If the indorser writes the words "order" after the name of the indorsee, the document becomes payable to the order of the indorsee and it will require a further indorsement. Where an indorsement has been indorsed in blank, any holder may convert it into a special indorsement by writing above his signature a direction to pay the amount of the instrument to the order or himself or someone else.
3. Restrictive indorsement - A restrictive indorsement is one which prohibits further negotiation of an instrument or which expresses that it is a mere authority to deal with the instrument as directed by the indorser, and not a transfer of the ownership, e.g., (1) "Pay Mr. Chaman Lal only."
4. Partial indorsement - A partial indorsement is one which purports to transfer to the indorsee a part only of the amount payable or which purports to transfer an indorsement to two or more indorsees separately. Such an indorsement does not operate as a negotiation of the instrument, as the law requires that an indorsement to be valid, must be of the entire instrument.
5. Conditional indorsement - A conditional indorsement is one which makes the transfer of property in an instrument from the indorser to the indorsee dependent on the fulfilment of a stated condition, such a condition may be disregarded by the paying banker in the case of a cheque.
6. Sans recourse indorsement - A sans recourse (without recourse to me) indorsement is one, where the indorser makes it clear that the indorsee or any subsequent holder should not look to him for payment, in case the instrument is dishonoured.
7. Facultative indorsement - A facultative indorsement is one where the drawer or any of the indorsers waives some of the holder's duties towards him, and adds to that effect to his signature, while indorsing the instrument e.g., "Notice of dishonour waived."
Ans. Inchoate stamped instrument : Section 20 of Negotiable Instrument Act provides :- "Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instrument then in force in [India] and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount :
Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder." In H. Maregowda v. Thippamma, AIR 2000 Kant. 169, it was observed that a reading of Section 20 reveals that the words used are `either wholly blank or having written thereon an incomplete negotiable instrument'. Thus even if a blank promissory note is given, it cannot be taken as a defence to avoid a decree based on such instrument once it is found that the document produced before the court satisfies the requirements of a promissory note within the meaning of the Act. The instrument may be wholly blank or incomplete in particulars in either case the holder has authority to make or complete the instrument as negotiable one.
Ans. Maturity : Section 22 of the Act says "The maturity of a promissory note or bill of exchange is the date at which it falls due." So section 22 makes it clear that a promissory note or bill of exchange can be said to be at maturity only when it specified the date on which the amount is payable. Therefore the term "maturity" can have no application to promissory note payable on demand.
Days of Grace : Section 22 of Act further provides that every promissory note or bill of exchange which is not expressed to be payable on demand at sight or on presentation is at maturity on the third day after the day on which it is expressed to be payable.
So provisions of Section 22(2) giving three days grace affects only instruments which are not written in an oriental language and instrument written in oriental language is governed by local usage. It is open to parties to enter into contract that the provisions of Section 22 relating to days of grace shall or shall not apply to them.
Calculating Maturity of Bill or Note, payable so many days after date or sight.
Section 24 of Negotiable Instruments Act provides that "In calculating the date at which a promissory note or bill of exchange made payable a certain number of days after date or after sight or after a certain event is at maturity, the day of date, or of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens shall be excluded."
When day of Maturity is a Holiday - Section 25 of Act says, "When the day on which a promissory note or bill of exchange is at maturity is public holiday the instrument shall be deemed to be due on the next preceding business day".
Ans. Definition of Hundi. - A Hundi may be defined as a bill of exchange drawn in a vernacular language in accordance with the customs of native merchants of India.
The drawer of a Hundi is called Shrofi, or Nanavaty, corresponding to a banker. The payee is called Rakhya Dhani.
A hundi is an internal bill of exchange and is in effect, and order signed by the drawer, made to the drawee for the purpose of paying to a person named in it, a sum of money stated in it, either at sight or at a certain period after presentation.
Hundi and bill of exchange distinguished. - Hundi may be employed for raising a loan and may be used for the purpose of financing trade, thus corresponding to the function of a bill of exchange. But hundis are usually not accompanied by document of title whereas bills are always almost so accompanied. A bill of exchange shows that it is drawn against an actual supply of goods from one place to another and as such it is more sound means of investment than an ordinary Hundi. Again a hundi may be used for remittance of money from one place to another whether for purposes of trade or for any other object.
Kinds of Hundis. - Hundis may be classified into two main broad divisions :-
Darshani Hundi. - It is payable at sight and serves the purpose of remittance of money. It is transferable by indorsement and usually passes freely through many hands amongst the indigenous bankers.
Hundiana is the commission or discount which the holder deducts from the amount of advance made against a hundi by him.
When a hundi is sold at a premium, i.e., at a price higher than its original amount, it is said to sell at Badha, but when it is sold at a discount, i.e., at a price of lower than the original amount it is said to sell at Batta.
The actual or the nature of wordings of a hundi vary according to the locality or the State.
Muddati Hundi. - When a Hundi is made payable after a specified period, it is called Muddati in the State of West Bengal, and Miadi in other parts of India. In drawing such a hundi, the usual practice is to charge an interest for the period specified in it at that time. Such a hundi may be made payable to a specified person or to bearer or to a man of worth and position.
Shahjog Hundi. - Amongst the current forms of hundis, Shahjog hundi is the most important. It may be Darshani or miadi one. It is a hundi made payable by the drawer only to a Shah or respectable holder, viz., a man of worth and substance known in the bazar. It ought not to be paid to the drawee unless the Shah by whom it is presented has endorsed on it, though till it reaches the hands of a Shah, it can pass from hand to hand by delivery and without indorsement. According to custom relating to these hundis, the Shah who obtains payment is bound, in the event of the hundi proving to be forged or stolen, to repay the amount paid to him with interest, unless he produces the actual drawer or the person who perpetuated the fraud.
The name of the depositor is mentioned in the body of the Hundi which contains a statement that the amount is to be paid to a Shah.
It may be compared to a generally crossed cheque. But at any subsequent period, its negotiability can be restricted by being specially endorsed.
Jokhimi Hundi. - This is a hundi which is drawn against goods shipped on a vessel named therein. The hundi is negotiated by the drawer to a person who purchases it for an amount less the commission, and who insures the goods against loss. He will recover the full value of the hundi from the consignee only on the safe arrival of the goods. If they do not reach the destination on account of loss or destruction, the consignee need not pay the value of the hundi nor need the consignor repay the money received by him, as the goods are insured.
Jokhimi hundi is akin to a policy of insurance with the difference that the money is paid before hand is recovered if the ship arrives safely. On the arrival of the goods, the drawer may obtain them or their value as stated in the hundi. It is an authority to the consignee to pay for the goods or deliver them to the holder.
This kind of hundi has fallen in disuse upon the establishment of insurance companies which now fulfil the purpose which was served by it.
Namjog hundi. - It is a hundi payable only to the person specially named in the body of the hundi or his order. If the party named in the hundi is sufficiently described, it is only payable to that person and it cannot be endorsed. But if a full description of the payee is not given, it can be endorsed like a bill of exchange. It is a very rarely used now-a-days.
Jawabi Hundi. - It serves the purpose of remittance of money. This kind of hundi is drawn in this way, that the person desirous of making the remittance writes to the payee and delivers the letter to a banker who indorses it to one of his correspondents near the payee's place of residence or negotiates it further. On receipt of the letter, the latter is forwarded by the banker to the payee who attends and gives his receipt in the form of reply to the letter and who is paid the money. The receipt is forwarded through the same channel to the drawer.
Nishan Jog Hundi. - If a hundi contains the word "Nishan Jog", the amount is to be paid only by the person presenting it.
Dhani Jog Hundi. - When the word "Dhani Jog" occurs in a hundi, the amount is payable to the presentor. (Dhani means owner or holder). It is negotiable as an instrument payable to bearer.
Farman Jog Hundi. - It is one which is made payable to order. The word "Farman" means an order.
Dekhanhar Hundi. - It is that hundi which is payable to bearer or presentor.
Peth and Perpeth. - Peth is a duplicate of a hundi given to the holder on the loss of the original one. In case of loss of the duplicate (Peth), the holder may get another which is known as perpeth.
Zikri Chit. - It is a letter of protection given to the holder of a hundi by the drawer or any prior party to the hundi to be used in case the hundi is not accepted. In it the addressee is asked to accept the hundi for honour.
Khokha is the name given to a hundi when paid up and cancelled.
(1) Darshani Hundis (i.e. payable at sight); and
(2) Muddati or miadi hundis (i.e. payable after a time).
The following chart shows clearly the classification of hundis :
Ans. According to Section 26 of the Act, every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
A minor may draw, indorse, deliver and negotiable such instrument so as to bind all parties except himself.
But a corporation is not empowered to make, indorse or accept such instrument except in case in which under the law for the time being in force, they are so empowered.
From this we see that every person who is capable to contract is also capable to negotiate. The capacity of a party to draw, accept, make or indorse a bill or a note is co-extensive with his capacity to enter a contract.
According to section 11 of the Indian Contract Act "Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject."
According to Section 11 of the Contract Act the disqualifications are of three categories :
(1) Due to minority,
(2) due to lucency, and
(3) due to personal law.
Ans. Liability of the maker of a promissory note and the acceptor of a bill of exchange.
Section 32 which provides about the liability of the maker of a note or the acceptor of a bill, is as follows :-
In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand.
Maker's liability - When the maker of a promissory note signs the same there is an unconditional undertaking made by him to pay the amount of the note according to its tenor. His engagement to pay is unconditional and his liability to pay is absolute. His liability arises when he signs the promissory note and delivers the same to the person in whose favour it has been made, i.e., the payee. Acceptor's liability - The drawee of a bill of exchange becomes liable on the bill when he accepts the same. An acceptance by him means his undertaking to pay the amount according to the tenor of the bill. The liability of the acceptor of a bill of exchange is similar to that of the maker of the promissory note. A bill of exchange contains an unconditional order and when the drawee accepts to pay the amount, there is obviously an unconditional undertaking by him to pay in accordance with the tenor of the bill. The acceptor of a bill of exchange is liable thereunder as principal debtor and as such, the suit filed merely against the acceptor of a Bill of Exchange is maintainable in law even though a separate suit has been filed by the plaintiffs against the drawers of that Bill of Exchange on the basis of the suit Bill of Exchange along with other reliefs claimed therein. (Union Bank of India v. Ankur Corp. AIR 993 Bom 297).
Ans. Liability of Drawer of Bill of Exchange and Cheque : Section 30 of Negotiable Instruments Act says - "The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due to notice of dishonour has been given to, or received by, the drawer as hereinafter provided."
So under Section 30 the drawer of a cheque is liable to pay only when (1) the cheque is dishonoured and (2) notice of such dishonour has been given or circumstances exists which render it necessary to give such notice. The notice of dishonour is therefore, a part of the cause of action on dishonoured cheque.
In view of Section 30 of Act drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee to compensate the holder provided due notice of dishonour has been given to him even if the documents of title were given to the drawee without a valid and proper acceptance, the drawer is liable and suit against him is maintainable (AIR 1983 Del. 240).
Liability of the drawee of a cheque - According to Section 31, the drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and in default of such payment, must compensate the drawer for any loss or damage caused by such default. The drawee bank is thus bound to honour the customer's cheque if he has sufficient funds of the drawer applicable to the payment of such cheque. If the drawee bank wrongfully dishonours the cheque it can be made liable for such default. The liability for such a default is not towards the payee or the holder but towards the drawer. The basis of the banker's liability is the relation between the bank and its customer which implies an undertaking to honour the customer's cheques if there are sufficient funds to meet the same. There are some cases when a banker may be either justified or bound to dishonour the cheques, dishonour of the cheques in such cases does not create any liability for the drawee bank.
Ans. Cases in which a banker is bound or justified in dishonouring the customer's cheques :
(1) When the customer countermands the payment - When the drawer of the cheque countermands the payment, that is issues instructions to the bank not to make the payment of a particular cheque issued by him, the authority of the bank to pay that cheque stands revoked.
Stopping payment of a Demand Draft - A draft is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand. A demand draft is procured for the purpose of transmitting money. Once the draft has been given to the payee, the bank cannot be asked to stop its payment. The purchaser of the draft can, however, require the bank to maintain caution, so that a wrong person, who is not the payee or the holder in due course, is not able to take its payment.
(2) Where there are no sufficient funds to meet the cheque -The banker's duty to pay a customer's cheque as stated in Section 31 is there in case of a cheque when he had "sufficient funds of the drawer in his hand". Therefore, when either there are no funds to meet the cheque or the amount to the customer's credit is insufficient to meet the whole amount of the cheque, the banker is justified in refusing the payment of that cheque.
(3) Funds not properly applicable to the cheque. - Under Section 31 banker's duty to honour the customer's cheque is there when the funds of the customer with him are "properly applicable to the payment of such cheque". Thus, if the funds in his hands are meant for being utilised for some other purpose, than Banker is justified to dishonour of cheque for other purpose.
(4) Cheque not properly presented. - When the cheque is not properly presented, for example it is presented at a branch where the customer has no account, or where his account is overdrawn, or where the cheque is presented after banking hours, or where the cheque is not presented within a reasonable time of its issue, i.e., it has become stale, the bank is justified in dishonouring the cheque. In India a cheque presented more than 6 months after the date of issue is deemed to be stale.
(5) Notice of customer's death. - On the death of the drawer the property in the balance of his account vests in his legal representatives and his order cannot withdraw what on more belongs to him. When the bank gets a notice of customer's death bank's authority to pay cheques drawn by him is terminated and the bank would not be justified in making the payment of such a cheque.
(6) When customer becomes insolvent. - When a customer is adjudicated insolvent his assets vest in the official assignee, who only has a power to deal with them. In such a case the banker must refuse to pay the insolvent customer's cheques.
(7) Notice of customer's insanity or lunacy. - When the bank gets a notice that his customer has become insane all operations on his account are to be suspended until either the customer recovers or there is an order from the court to that effect.
(8) On receipt of court's orders prohibiting payment. - On receipt of the garnishee or other legal order attaching money in customer's account or otherwise dealing with that money the banker is bound to dishonour customer's cheques.
(9) When the cheque is post-dated or stale. - A customer's order to a pay cheque is deemed to be made on the date it bears and, therefore, if the cheque is presented before that date, the banker is justified in refusing the payment of the sum.
If a cheque is not presented within 6 months from the date of its issue, it is deemed to be stale according to well recognised banking practice. A bank is justified in refusing the payment of such a cheque.
(10) When the cheque is of doubtful legality. - When the cheque is of doubtful legality, or is illegal because it does not bear the stamp which the law required the banker is justified in refusing the payment.
Ans. Liability of drawer - In case the bill of exchange or cheque is dishonoured by the drawee or acceptor thereof, the drawee of the bill of exchange or cheque is bound to compensate the holder, provided that he has given to or received due notice of dishonour as provided in Section 13 to 18 of the Negotiable Instruments Act. In case of the holder fails to give due notice of dishonour then such failure would discharge the drawer not only of his liability upon the bill, but also upon the original debt.
Liability of drawee of a cheque - The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to payment, of such cheque must pay the cheque when duly required to do so, and, in default of such payment; must compensate the drawer of any loss or damage caused by such default.
The relationship between the drawer of a cheque usually called customer and the Banker is founded on a contract between them and is equivalent to the relation between a creditor and a debtor with a superadded obligation on the part of the banker to honour the cheques drawn by his customer. In case he fails to discharge this duty he is liable to compensate the customer for any loss that he sustains by reason of such failure.
Ans. According to Section 33 of Negotiable Instruments Act, only following persons can accept a bill of exchange :-
(i) The drawee of a bill.
(ii) All or some of several drawees, where the bill is addressed to more than one drawee.
(iii) A drawee in case of need who is mentioned in the bill.
(iv) An acceptor for honour.
As a general rule, no one can accept the bill except the person to whom it is addressed but section 33 recognises the exception to this rule and provides that an acceptor for honour can bind himself by such acceptance. In a case reported in AIR 1961 Cal. 653 acceptance of bill of exchange through agent was held proper in view of provisions of Section 33 of Act. Liabilities of an Endorser - Section 35 of Negotiable Instruments Act says - "In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity without, in such indorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to or received by, such indorser as hereinafter provided. Every indorser after dishonour is liable as upon an instrument payable on demand." So Endorser is responsible to every subsequent holder in case of dishonour by drawee if he had notice of dishonour, except where (a) there is contract to contrary or (b) he expressly limits his liability in endorsement.
Ans. Section 40 of Negotiable Instruments Act provides :- "Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsement in blank :-
First indorsement, "B".
Second indorsement, "Peter Williams".
Third indorsement, "Wright and Co."
Fourth indorsement, "John Rozario".
This bill A puts in suit against John Rozario and strikes out, without John Rozario's consent, the indorsements by Peter Williams and Wright and Co. A is not entitled to recover anything from John Rozario. So Section 40 of Act comes into operation only when the holder of a negotiable instrument destroys the endorser's remedy without consent of the endorser.
Ans. According to Section 39 of Negotiable Instruments Act, when the holder of an accepted bill of exchange enters into any contract with the acceptor which under Section 134 or 135 of the Indian Contract Act, 1872 would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged.
According to Section 134 of the Indian Contract Act the surety is discharged in case the creditor releases the principal debtor by a contract, and according to Section 135 a surety is discharged when creditor compounds with, gives time to or agrees not to sue, principal debtor, automatically without any right to the creditor.
But Section 39 of the Negotiable Instruments Act enables the holder of a bill of exchange to enter into any contract with the acceptor, without thereby losing his rights against the other parties, provided he expressly reserves his rights against those other parties.
For example, the holder of a bill for Rs. 5000 takes from the acceptor Rs. 3000 in full satisfaction of his claim against him. All the other parties are discharged. But if the holder expressly reserves his right to charge them they are not discharged.
Ans. As a general rule, any forged instrument does not convey any title thereto even to its holder whose bona fides are beyond doubt and for value. Thus an acceptor of a bill of exchange is not precluded by his acceptance from showing that endorsement is forged.
Section 41 of Negotiable Instruments Act provides :-
"An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to be forged when he accepted the bill."
This rule of law is based upon equitable principle that no person can be permitted to take advantage of his fraud or wrong.
Ans. Section 42 of Negotiable Instruments Act provides :- "An Acceptor of a bill of exchange drawn in a fictitious name and payable to drawer's order is not, by reason that such name is fictitious relieved from liability to any holder in due course under an indorsement by same hand as the drawer's signature and purporting to be made by the drawer."
The rule embodied in Section 42 of Act, though speaks of bill of exchange only, is also applicable to other instruments also in view of provisions of Section 120 read with Section 8 of the Act. Therefore the maker of promissory note who executed the instrument for consideration cannot escape the liability to the holder of the instrument simply because the instrument was drawn in fictitious name.
This is based on following rule of English law :-
"Where a bill is drawn in the name of a fictitious person payable to the order of the drawer the acceptor is considered as undertaking to pay to the order of the person who signed as the drawer; and therefore an indorsee may bring evidence to show that the signature of the supposed drawer, to the bill and to the first indorsement, are in the same handwriting." [Cooper v. Meyer, (1823) 10 B and C 468].
In such a case the drawer is fictitious and the bill is drawn to his own order and the drawer and the payee are one and the same person and fictitious. Therefore, before such a bill can be negotiated, the supposed drawer must indorse in his own handwriting. The acceptor is liable only to the holder in due course and not to a holder who knew or had reason to believe that the drawer or the payee was a fictitious person.
Ans. Consideration is required for the validity of every contract. A negotiable instrument also contains contract for payment of a certain sum of money, consideration is required for the same also. In an ordinary contract the law does not presume the presence of consideration and the person enforcing the contract has to prove the same. In the case of negotiable instrument, on the other hand, there is a presumption of consideration. The presumption is rebuttable by a person who wants to avoid his liability on the ground of absence of consideration. Sections 43 to 45 provide as to how far the total or a partial absence of consideration affects the liability of the parties to a negotiable instrument.
Total absence or failure of consideration. - The rule regarding absence or failure of consideration, which is stated in Section 43, is that a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which falls, creates no obligation of payment between parties to the transaction. Want of consideration can be taken as a defence to avoid the liability only towards parties to the transaction, i.e., those parties who have immediate relation with one another. The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange, or cheque stands in immediate relation with the payee, and the indorser with the indorsee.
So absence or failure of consideration creates no obligation of payment only between parties to the transaction. If a person receives a negotiable instrument without consideration but transfers the instrument to a holder for consideration such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto (Section 43).
Partial absence or failure of money consideration. - When the consideration for which a person signed a promissory note, bill of exchange or cheque, consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced. Partial absence or failure of money consideration in a negotiable instrument affects the rights of the holder against the immediate parties who signed the instrument and he is entitled to recover only that amount for which consideration was there. For example, A draws a bill on B for Rs. 500 payable to the order of A, B accepts the bill, but subsequently dishonours it by non- payment. A sues B on the bill. B proves that it was accepted for value as to Rs. 400, and as an accommodation to the plaintiff as to the residue. A can recover only Rs. 400.
Partial failure of consideration not consisting of money. - When the partial failure of consideration does not consist of money, the rule regarding the extent of liability of the parties, which is contained in Section 45 is as follows :
"Where a part of the consideration for which a person signed a promissory note, bill or exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced."
So when the partial failure of consideration is other than money, the liability of the signer of the negotiable instrument standing in immediate relationship with the holder is proportionally reduced, provided that the consideration which has failed can be ascertained in terms of money without collateral enquiry.
Ans. A. Two modes of negotiation. - A negotiation can be materialised with by delivery under section 47 or by delivery and endorsement under section 48.
(1) Negotiation by delivery. - According to the provisions of section 47 negotiation by delivery is as follows : Subject to the provisions of section 48 a promissory note, bill of exchange or a cheque payable to the bearer is negotiable by delivery therefrom.
Delivery of any instrument means transfer of the possession of any instrument from the transferor to the transferee. This may be done by actual or constructive delivery but it must have been done with an intention to negotiate the instrument. Delivery of corpus of the instrument with an intention to transfer the interest to the transferee is the main ingredient which has to be looked for, for ascertaining the validity of transfer by delivery.
A, the holder of negotiable instrument payable to bearer delivers it to B's agent to keep for B. This instrument has been negotiated.
When an instrument is transferred by mere delivery, the transferor does not sign the instrument and therefore he does not remain liable on the instrument to any body. Such a transfer is in the nature of a sale of the instrument. The transferor is not liable even to refund the money received if the transferee subsequently finds it unable to recover the value of the instrument from the party liable thereon. He will be so liable only when he is guilty of any fraud in effecting the transfer, as and when the bill turns out to be worthless and consideration totally fails.
Exception to general rule. - Though, as a rule negotiation is completed by delivery of the instrument. Section 47 also provides an exception to this rule, namely, that a promissory note, bill of exchange or a cheque delivered on the condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.
In other words if the delivery of a negotiable instrument is attached with a condition precedent, it is not to take effect unless the condition precedent is fulfilled. The negotiable instrument will be deemed to have been transferred only on the happening of that event, which was declared as condition precedent.
(2) Negotiation by endorsement. - Subject to the provisions of Section 48 a promissory note, bill of exchange or a cheque payable to the order is negotiable by the holder by endorsement and delivery thereof. Without endorsement transferee cannot be constituted a holder in due course. If an instrument payable to order is transferred by mere simple delivery the transferee merely acquires the right of an assignee of an ordinary choice in action does not get any of the advantages of negotiability, for the instrument not being endorsed, if merely assigned and not negotiated.
Negotiation - Meaning of the term by Indorsement.
Section 15 of Negotiable Instruments Act defines Indorsement as under : "When the maker or holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation, on the back or face of that instrument, or separately on a slip of paper attached to that instrument or signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same. The person who indorses, is called indorsee.
In short the indorsement can be said the writing of one's name, usually on the back of the negotiable instrument with the intention of transferring the same.
Persons who may negotiate and endorse - In accordance with the provisions of Section 51 every sole maker, drawer, payee or endorsee, or all of several joint makers, drawers, payees or endorsees, of a negotiable instrument may, if the negotiability of such instrument has been restricted or excluded as mentioned in Section 50, endorse and negotiate the same.
Explanation - Nothing in this section enables maker or drawer to endorse or negotiate all instruments, unless he is a holder thereof.
Section 51 enumerates persons who may endorse. Therefore, if a stranger endorses an instrument he cannot be called an endorser, neither is he liable thereon as such. He may be held liable only as a guarantor to the person in immediate relationship with him :
A bill is drawn payable to, `A or orders'. A endorses it to B, the endorsement not containing the words "or order' or any equivalent words. B may negotiate the instrument.
Section 51 gives a list of persons who can negotiate. It should be noted that where an instrument is made, drawn, etc. by more than one maker the endorsement to be effective must be made by all of them. If, however, the endorsement is expressed to be payable to the order of either of them, any of them may endorse. When the endorsees or payees are partners of a trading partnership, only one partner may sign the endorsement to bind the other partner. All partners need not sign.
Ans. Yes, according to Section 49 of the Negotiable Instruments Act an indorsement in blank can be converted into an indorsement in full. Any holder of a bill indorsed in blank may convert the indorsement in blank into an indorsement in full by writing above the indorser's signature a direction to pay the instrument to another person or his order.
The advantage of such a course is that the holder, though he transfers the instrument, does not incur the responsibility of an indorser.
Illustration. - A is the holder of a bill indorsed by B, in blank. A writes over B's signature the words "Pay to C or order." A is not liable as an indorser, but the writing operates as an indorsement in full from B to C.
Effect of indorsement. - The indorsement of a negotiable instrument followed by the delivery transfers to the indorsee the property therein with the right of further negotiation; but the instrument may, by express words, restrict or exclude such right, or may, merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser for some other specified person.
Illustrations. - B signs the following indorsements on different negotiable instruments payable to bearer :-
(a) "Pay the contents to C only."
(b) "Pay C for my use."
(c) "Pay C or order for the account of B."
(d) "The within must be credited to C."
These indorsements exclude the right of further negotiation by C.
(e) "Pay C value in account with the Oriental Bank."
(g) "Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the indorser and others."
These indorsements are executed by C to the indorser and others. These indorsements do not exclude the right of further negotiation by C.
Ans. Section 58 of Negotiable Instruments Act says - "When a negotiable instrument has been lost or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder or from any party prior to such holder, unless such possessor or indorsee is or some person through whom he claims was, a holder thereof in due course."
So no holder of negotiable instrument, though he may be holder, in due course can acquire title to instrument through a forged endorsement. Under Section 58, when a negotiable instrument has been obtained from any maker by fraud or for an unlawful consideration, the ordinary presumption that holder is a holder in due course is rebutted and case comes under proviso to Section 118(g) of Act and burden of proving that holder is holder in due course lies upon holder. As required by Section 9, holder in order to prove that he is holder in due course, has not only to show that he is a holder for value but further he has to show that he became the holder of instrument before it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Ans. Position of transferee of an overdue or dishonoured instrument. - Section 59 of the Negotiable Instruments Act deals with the position of a transferee of dishonoured and overdue instrument. Ordinarily a bona fide holder for value takes the instrument free from all defects and makes all prior parties liable. However, an exception is made in the case of dishonoured or overdue instrument. Section 59 lays down that when the holder of a negotiable instrument has obtained it with a notice of dishonour, whether by acceptance or by non-payment, or after maturity he has only, as against the other parties, the rights on it of his transferor. In other words, when a person obtains a negotiable instrument with a notice of dishonour, he cannot claim the privilege of a holder in due course, i.e., he cannot claim payment of the amount of the instrument but will have the rights, as against other parties, which his transferor possessed. Thus after the dishonour of the instrument it ceases to be a negotiable instrument.
The holder of an instrument after it has become overdue does not acquire the rights of a holder in due course as the instrument ceases to be a negotiable instrument after the expiry of the date of maturity. He possesses only the rights which his transferor himself possessed as against other parties. After maturity the instrument ceases to be negotiable and the transfer only operates as an assignment.
An instrument is said to be overdue when it is not paid on or before the due date. If there are days of grace in an instrument, it cannot be said to be overdue until the expiry of the last day of such grace and hence a transfer of an instrument on the last day of grace is not a transfer of an overdue instrument.
The proviso to Section 59 applies only to cases of accommodation bills. It gives an exception to the rule as laid down in the first paragraph of section 59. The proviso states that any person who, in good faith and for consideration, becomes the holder after maturity, of a promissory note accepted without consideration for the purpose of enabling some party to it to raise money on it, may recover the amount of the note or bill from any prior party. Thus the proviso gives an exception in favour of a transferee of an accommodation note or bill who is entitled to recover on the note or bill, no matter whether the transfer is made before or after maturity, but only if it is for value and in good faith. Such transferee can claim the amount of the note or bill from all prior parties.
Illustrations. - (a) The acceptor of a bill of exchange when he accepted it, deposited with the drawer certain goods as a collateral security for the payment of the bill, with power to the drawer to sell the goods and apply the proceeds in discharge of the bill if it were not paid at maturity. The bill not having been paid at maturity, the drawer sold the goods and retained the proceeds but indorsed the bill to A.
A's title is subject to the same objection as the drawers' title.
(b) A bill is dishonoured by non-acceptance. The bill is indorsed to A who indorses it to B. As between A and B the bill is subject to an agreement as to the discharge of A. The bill is afterwards given to C who takes it with notice of dishonour. C takes the bill subject to the agreement between A and B.
Ans. The payee or holder of an instrument has certain duties to perform, before he can claim payment. If the bill requires acceptance, it must be presented for acceptance. Presentment is presentation of the document to the drawee, maker or acceptor in order to fix liability upon the individual concerned. Presentment may be of following types :-
(a) Presentment of bill of exchange for acceptance (Section 61).
(b) Presentment of a promissory note for sight (Section 62).
(c) Presentment of a promissory note, bill of exchange or cheque for payment (Section 64).
Acceptance is required only in case of bill of exchange, therefore, only in case of bill of exchange, it is presented for acceptance. Presentment for acceptance means exhibiting the bill of exchange to drawee to procure the acceptance thereof. Every negotiable instrument, promissory note, bill of exchange or cheque is ultimately meant for payment, for which it is always required to be presented to the maker, drawee or acceptor as the case may be.
Ans. Presentment for Acceptance - Only a bill exchange is to be presented for acceptance. Every bill of exchange is not required to be presented for acceptance. A bill of exchange payable on demand, or on a day certain; or a certain period after date need not be accepted and it becomes due for payment even otherwise. Such a bill may be presented for payment without previously presenting it for acceptance. When a bill of exchange is expressed to be payable "after sight", it means that its payment is to be made only "after acceptance". To fix the maturity of such a bill of exchange its acceptance, which includes its presentment for acceptance, is absolutely necessary.
Although the presentment for acceptance is compulsory only in a bill of exchange payable "after sight" and not in other cases, there are certain advantages of presenting bills for acceptance even though the same is not compulsory. (i) The first advantage is that, in case the drawee accepts the bill, there is an additional security of the acceptor's name to the bill. And (ii) if the drawee dishonours the bill, the holder can immediately have his recourse against the drawer or the indorsers, if any. The drawer also, on receiving the notice of dishonour, can get his effects from the hands of the drawee.
Presentment to whom ?
1. Generally it is the drawee to whom the presentment is to be made for acceptance. Acceptance can also be made by a duly authorised agent on behalf of a drawee.
2. Where there are several drawees, all of them are required to accept and therefore presentment for acceptance is to be made to them all.
3. If the drawee is dead, the presentment may be made to his legal representative.
4. If the drawee becomes insolvent, the presentment may be made to his assignee.
5. When a drawee in case of need has also been mentioned in a bill of exchange, on the dishonour of the bill of exchange by the drawee the same has to be presented to the drawee in case of need.
Presentment by whom ?
The presentment is to be made by the holder of a bill of exchange. A bill of exchange may be negotiated even before the acceptance has been obtained. The holder who takes the bill impliedly undertakes to procure the acceptance thereof by properly presenting the same as required by Section 61.
Time and place of presentment
If any time or place for presentment is specified in a bill of exchange it must be presented for acceptance accordingly. Where no time and place for presentment is mentioned in the bill it must be presented within a reasonable time after it has been drawn, and in business hours on a business day. The presentment may be made either at the place of business of the drawee or at his residence. If the drawee had no known place of business or fixed residence, and no place is specified in the instrument for acceptance, such presentment may be made to him in person wherever he can be found.
Holder's duties on presentment
The holder's duties on presentment are :-
1. To present the bill of exchange for acceptance within the time specified in the bill for that purpose, and if no time is specified, within a reasonable time after it has been drawn.
2. To present the bill at the place, if any, mentioned in the bill, and if no place is mentioned, at the usual place of business of the drawee or his residence.
3. To allow the drawee only 48 hours and not more, to consider whether he will accept the bill or not.
4. To obtain an unqualified acceptance of the bill.
Effect of non-presentment When the presentment of a bill of exchange for acceptance is compulsory i.e., when a bill of exchange is payable after sight, holder's duty is to duly present the bill to the drawee thereof as required by Section 61. In default of such presentment, no party thereto is liable thereon to the person making such default. When presentment for acceptance is excused1. When the drawee, even after a reasonable search, cannot be found, the presentment for acceptance is excused and the bill of exchange is deemed to be dishonoured. Where the drawee is dead, the presentment is to be made to his legal representative, and in case of his insolvency to his assignee.
2. Where the drawee is a fictitious person, or he is incompetent to contract, the bill can be treated as dishonoured even without presentment for acceptance.
Ans. Presentment of Promissory Note for Sight -Section 62 of Negotiable Instruments Act says :- "A promissory note payable at a certain period after sight must be presented to maker thereof for sight (if he can after reasonable search be found) by a person entitled to demand payment within reasonable time after it is made and in business hours on a business day. In default of such presentment, no party thereto is liable thereon to the person making such default."
In ________________ AIR 1954 SC 554 (556), it was observed that - In a bill payable after sight there are two distinct stages, firstly when it is presented for acceptance and later when it is presented for payment. Section 61 deals with former and Section 64 with the latter. Presentment for acceptance must always and in every case precede presentment for payment. But when bill is payable on demand both stages synchronise and there is only one presentment which is both for acceptance and for payment.
Ans. The holder or his authorised agent must present the promissory notes, bills of exchange and cheques to the maker, acceptor or the drawee thereof respectively in the following manner :
1. A presentment for payment must be made during the usual hours of business, and if at a banker's within banking hours.
2. A promissory note or bill of exchange made payable at a specified period after date or sight thereof must be presented for payment at maturity.
3. A promissory note payable by instalments must be presented for payment on the third day after the date fixed for payment of each instalment and non- payment on such presentment has the same effect as non-payment of a note at maturity.
4. An instrument, made, drawn or accepted payable at a specified place must in order to charge any party thereto, be presented for payment at that place and not elsewhere.
5. A promissory note or bill of exchange not made payable at a specified place must be presented for payment at the place of business, or at the usual residence of the maker, drawee or acceptor thereof.
6. If the maker, drawee or acceptor of a negotiable instrument has no known place of business or fixed residence, and no place is specified in the instrument for presentment for acceptance or payment, such presentment may be made to him in person wherever he can be found.
7. A cheque must in order to charge the drawer be presented at the bank upon which it is drawn before the relation between the drawer and his banker has been altered to the prejudice of the drawer.
8. A cheque must in order to charge any person except the drawer, be presented within a reasonable time after delivery thereof by such person.
9. A negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder.
10. Presentment for acceptance or payment may be made to the duly authorised agent of the drawee, maker or acceptor, as the case may be, or where the drawee, maker or acceptor has died, to his legal representative, or where he has been declared an insolvent, to his assignee.
11. Delay in presentment for acceptance or payment is excused if the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate, presentment must be made within a reasonable time.
Ans. Section 78 of Negotiable Instruments Act says :- "Subject to the provisions of Section 82 Clause (c), payment of amount due on a promissory note, bill of exchange or cheque must, in order to discharge the maker or acceptor, be made to holder of the instrument."
Section 82(c) says : "The maker, acceptor or indorser respectively of a negotiable instrument is discharged from liability thereon to all parties thereto, if the instrument is payable to bearer or has been indorsed in blank and such maker, acceptor or indorser makes payment in due course of the amount due thereon."
In Tolani Shipping Co. Ltd. v. Saw Pipes Ltd. (1999) 97 Comp. Cases 394, it was held that Section 78 of Act is subject to Section 82(c) which provides that maker, acceptor or endorser respectively of negotiable instrument is discharged from liability thereon by payment to all parties thereto, if the instrument is payable to bearer or has been endorsed in blank and such maker, acceptor or endorser makes payment in due course of amount due thereon.
Section 10 of the Act defines clearly the payment in due course. It means payment in accordance with the apparent tenor of the instrument in good faith and without negligence, to any person in possession thereof, under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. This involves several points for our consideration, viz., that the payment is made to -
(a) a person in possession of the instrument;
(b) in accordance with the apparent tenor of the instrument;
(c) that it was paid in good faith, without suspecting that the person in possession is not entitled to payment;
(d) the payment is made without negligence;
(e) whenever a cheque supposedly issued by a customer is presented before a bank, it carries a mandate to the bank to pay, but if a cheque is a forged one, there is no such mandate and the bank can escape the liability only if it can establish that the customer had knowledge of that forgery,
(f) a payment made on a forged cheque cannot be regarded as payment in due course,
(g) in case of payment made by the Bank on a forged cheque it cannot escape liability only by proving that it made payment in due course according to the apparent tenor of the cheque or by comparing the signature on the cheque with the specimen signature and finding no apparent discrepancy. (Babulal Aggarwal v. SBI (1988) 64 Comp. Cases 467).
Ans. Interest - In the case of negotiable instrument sometimes the question arises as to what interest should be given to the party. As long as the parties dealt fairly and openly with each other, they were at liberty to fix any rate of interest they pleased and the court was bound to see that the contract was performed. Now, the Court under Section 79 of the Negotiable Instruments Act has the power to grant relief against excessive interest (Harish Chand v. Ganga Singh, AIR 1974 P&H 156).
This difficulty disappears when the parties themselves agree as to the rate of interest. If they specify this rate in the note itself expressly, interest shall be calculated at the rate specified on the amount due as principal, on the bill or note, from the date of the instrument until (1) tender or (2) realization of such amount or (3) if a suit is filed to recover it until such date as the Court directs.
Interest when no rate is specified. - Section 80 deals with cases in which the interest is mentioned but the rate at which it is to be changed is not specified. When no rate of interest has been specified in the instrument, interest on it shall be six per cent, per annum from the date on which it ought to have been paid by the party charged, until tender or realisation of the amount due thereon (Ghasi Patra v. Brahma Thati, AIR 1962 Orissa 35). When the party charged is an indorser of an instrument dishonoured by non-payment, he is liable to pay interest only from the time he receives notice of dishonour. These are cases where the bill is silent with regard to interest. But the above provision of granting six per cent, interest is subject to one provision of the Civil Procedure Code, viz. if "summary procedure" is adopted to enforce payment of negotiable instruments, the plaintiff is not entitled to recover any interest, unless the same is specified in the instrument itself.
In the case of a promissory note payable on demand the interest runs from the day of execution, and not from the day upon it is presented for payment.
In K. Raj Gopal v. M. Thiagrajan (1999) 95 Comp. Cases 286, it was observed that Section 80 of the Act provides for cases where no rate of interest is mentioned in the instrument. This section governs a case where in a negotiable instrument, payment of interest is mentioned but no rate is stipulated and also a case where there is no interest mentioned at all in instrument. Any agreement between parties contemporaneous with or subsequent to the date of negotiable instrument, also will not have any effect and such agreement will be unenforceable.
Ans. Sections 82 to 87 of Negotiable Instruments Act lay down the various modes in which the individual liability of several parties to a negotiable instrument is discharged.
When a party, who is liable on a negotiable instrument, ceases to be liable he is said to be discharged from liability. Discharge from liability of a party to a negotiable instrument is to be distinguished from discharge of the negotiable instrument itself. When only some of the parties to a negotiable instrument are discharged from liability but others continue to be liable thereon, it is only a discharge of some of the parties from liability.
Modes of discharge
The parties to negotiable instruments may be discharged in the following ways :-
1. By payment. - It is the most common mode of discharge. Since a negotiable instrument is ultimately meant for payment, payment of the amount due on the instrument to the holder (Section 78) would result in the discharge of the parties to the instrument. Payment by the maker, drawee or acceptor would result in the discharge of the instrument, i.e., those other parties who may also be liable on the instrument are also discharged. When a negotiable instrument is payable to bearer, either because it is originally so made or there is an indorsement in blank, the payment of the amount due thereon in due course, to the bearer thereof would discharge the instrument (Section 82(C).
So long as the negotiable instrument is not discharged it can continue to be negotiated. According to Section 60, "A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction." If the payment is made before maturity it is not payment in due course.
Payment should be in due course
The instrument is discharged if its payment is made in due course as defined in Section 10.
In order that the discharge of the instrument is a valid one it is essential that the payment must be in due course of the amount due on the negotiable instrument. The amount due includes not only the principal amount but the interest as well, if the same becomes due. According to Section 79, when interest at a specified rate is expressly made payable on a promissory note or bill of exchange, interest shall be calculated at the rate specified, on the amount of the principal money due thereon, from the date of the instrument, until tender or realization of such amount or until such date after the institution of a suit to recover such amount as the Court directs. But where no rate of interest is specified in the instrument, according to Section 80, the interest on the amount due thereon shall be calculated at the rate of six per cent per annum, from the date at which the same ought to have been paid by the party charged, until tender or realization of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.
2. By Cancellation. - Another mode of discharge of an instrument by the holder or his agent is cancellation. It must be intentionaly and apparent on the face of it. It need not be at or after maturity. Any party liable on a bill may be discharged by intentional cancellation of his signature by the holder or his agent. In that case any indorser who would have had a right or recourse against the parties whose signature is cancelled is also discharged. A discharge of a principal debtor will discharge the sureties. The cancellation of the drawer's name discharges him and all indorsers; that of an indorser's name would not only discharge him, but all persons subsequent to him; and the cancellation of the acceptor's or maker's name would discharge all parties to the bill.
It is clear that in a suit based on negotiable instrument, it is not open to either side to show that they acted benami through others. Benami transactions are not recognised in connection with negotiable instruments. In the instant case, the defendant has denied the execution of the pronote in favour of the plaintiff. The promissory note stands in the name of the plaintiff. In view of Section 82(c) of the Negotiable Instruments Act the defendant cannot raise the plea, which he has raised regarding discharge. The defendant has raised a plea of benami transaction which is not recognised under the Act. (Bal Chand v. Satish Chandera, AIR 1983 Raj 23).
3. By Release. - According to Section 82(b), discharge of parties liable on a negotiable instrument may also be affected by release. This provision intends to include all cases of discharge of the maker, acceptor or indorser except cancellation. It mainly covers discharge by an agreement between the parties, and includes waiver, release and accord and satisfaction. Section 63, Indian Contract Act also contains a provision to that effect. It provides that every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. This provision is applicable to all contracts including those of negotiable instruments.
4. By Material Alteration. - The instrument is useless and is discharged if it is materially altered. A material alteration is one which causes the instrument to speak a different language in legal effect from that which it originally spoke, or which changes the legal identity or character of the instrument, either in its terms or the relation of the parties to it. In that case it will be void as against every person who is a party to the bill, at the time of such alteration, if it is without his consent. But if it was made in order to carry out the common intention of the original parties, the bill is not discharged. But what is a material alteration ? "Any alteration of the date, the sum payable, the time of payment, the place of payment, and where a bill has been accepted generally, the addition of the place of payment without the acceptor's assent" is a material alteration.
Again alteration which is not material will not discharge the bill.
There are certain cases of material alterations in which the bills will not be discharged. Section 87 of the Negotiable Instruments Act provides that in certain cases even material alterations would not discharge the bill. Thus -
(a) If an inchoate instrument is filled up under Section 20, or
(b) Convert a blank indorsement into full without signing oneself (Section 49), or
(c) Qualify the acceptance (Section 86), or
(d) Crossing a cheque which was not crossed before (Section 125)
If a material alteration is made by an indorsee it discharges the indorser from all liability to him in respect of the consideration of it. A plaintiff, who has been guilty of a material alteration of a promissory note in his favour cannot enforce the same and nor can he fall back on the original consideration nor can he invoke the provisions of Section 65 of the Contract Act (9 of 1872) to sustain his claim (Naryan Prasad v. Ghanshyam Lal, AIR 1961 M.P. 62). The holder cannot sue for consideration of a bill which is materially altered unless he shows (1) that the bill was negotiated to him after the alteration was made, and he was ignorant of the alteration; or (2) if the bill was altered whilst in his possession and under his control and there was no intent to commit fraud by the alteration, and the defendant would not have had any remedy over the bill if there been no alteration. Payment of altered instrument - It sometimes happens that though the bill is materially altered, it does not appear to be so altered. In such a case if a person liable to pay, pays it according to the apparent tenor of it, in due course, the person paying is discharged from all liability on the instrument. This payment cannot be questioned by reason of the instrument having been altered. Three things are necessary for this payment to be good -(1) That the payment was made in due course;
(2) The alteration or crossing was not apparent; and
(3) The payment was made by the person liable to pay, and in the case of the cheque, by the banker;
(4) Such payment will not only discharge the person paying from any liability under the bill, but he can also debit the person on whose account the payment was made;
(5) If a bill of exchange which has been negotiated, is, at or after maturity, held by the acceptor in his own right, all right of action on it are extinguished : (1) The bill must come to the acceptor, (2) after payment, (3) at or after maturity and (4) in his own right, and not as an executor or a trustee.
The same principles would apply to the maker of a promissory note. In Anirudhan v. Thomco's Bank, AIR 1963 SC 746, it was observed that if the alteration is made by stranger without knowledge of the promisee, other party is discharged if instrument is altered by a stranger when instrument was not in the custody of promisee, the promisor is not discharged. 5. By non-presentment for acceptance of a Bill of Exchange. - Section 61 of Act requires that when a bill of exchange is payable after sight, its holder must present it for acceptance to drawee within a reasonable time after it is drawn. If he makes a default in making such presentment, the drawer and all indorsers who were liable towards such a holder are discharged from their liability towards him. 6. By the holder allowing the drawee of a bill more than 48 hours to accept. - When the holder presents the bill of exchange to the drawee for acceptance, the drawee is entitled to be allowed a period of 48 hours (exclusive of public holidays) to consider whether he will accept the bill or not. After the expiry of the period of 48 hours the holder is bound to demand back the delivery of the bill, whether the same has been accepted or not. If the drawee does not return the bill duly accepted within 48 hours of the presentment the holder should deem the bill to have been dishonoured. If the holder of the bill allows the drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. (Section 83). 7. By the holder agreeing to a qualified or limited acceptance of bill of exchange. - If the holder of a bill of exchange, who presents the same for acceptance, acquiesces in a qualified acceptance of the bill, all previous parties whose consent is not obtained to such an acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance (Section 86). Acceptance of a bill is deemed to be qualified in the following cases :(a) When the acceptance is conditional, declaring the payment to be dependent on the happening of an event.
(b) Where the acceptor undertakes the payment of part only of the sum ordered to be paid.
(c) When the acceptor accepts to pay at a specified place only and not elsewhere.
(d) Where the acceptor undertakes the payment at a time other than that at which under the order it would be legally due.
(e) When acceptance is made by some of the drawees only and not by all of them, unless the drawees of the bill are partners.
Ans. Dishonour of Instrument :- In reference to bills of exchange there is said to be dishonour in two cases :- (a) When the drawee refuses to accept or (b) after acceptance he refuses to pay on due date. The expression `dishonour' is to be interpreted to mean not merely dishonour as contemplated by Section 91 and 92 of Act but dishonour in other contingencies.
In K. Vankatasubbaya v. P.R. Rao Tobaco Co., AIR 1972 AP 72 , it was observed that "A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of bill and drawee of cheque makes default in payment upon being duly required to pay the same. As against sections 91 and 92 apply to all three types of instruments namely promissory notes, bills of exchange and cheques. When the maker of note or an acceptor of bill of exchange or drawee in case of need, or an acceptor of bill protests or a banker to whom a cheque is drawn fails and neglects to pay the amount against the instrument according to apparent tenor thereof when presented to him on due date, dishonour is complete.
Dishonour is of two kinds :
1. Dishonour of a bill of exchange by non-acceptance (Section 91).
2. Dishonour of a promissory note, bill of exchange or cheque by non-payment (Section 92).
1. Dishonour by non-acceptance. - Since presentment for acceptance is required only of a bill of exchange, it is only the bill of exchange which could be dishonoured by non-acceptance. Section 91 provides that the dishonour of a bill of exchange, by non-acceptance, may take place in any of the following ways :-(1) When a bill of exchange is presented for acceptance and the drawee or the drawees makes default in acceptance. When there are several drawees even if one of them makes a default in acceptance the bill is deemed to be dishonoured, unless these several drawees are partners.
(2) Where presentment for acceptance is excused and the bill is not accepted, for example, if the drawee cannot, after a reasonable search, be found, the bill is dishonoured.
(3) Where the drawee is incompetent to contract, the bill is treated to be dishonoured.
(4) When the drawee makes a qualified acceptance, the holder may treat the bill of exchange having been dishonoured.
2. Dishonour by non-payment. - A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. When presentment for payment is made and the maker, acceptor or drawee, as the case may be, makes default in making the payment, there is dishonour of the instrument. Apart from that there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonoured even without presentment.
Ans. Section 93 deals with the subject which runs as follows :-
"When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to someone of several parties whom he seeks to make jointly liable thereon.
"Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note or the drawee or acceptor or the dishonoured bill of exchange or cheque."
From this section we see when the negotiable instrument is dishonoured either by non-acceptance or by non-payment the holder of the instrument or some party to the instrument who is liable thereon must give notice to all other parties whom the holder seeks to make severally liable and to someone of several parties whom he seeks to make jointly liable thereon.
The object of giving notice is not to demand payment for the party giving notice, but to warn the party notified of his liability. A party to a negotiable instrument is aware that he may be called upon to liquidate his liability.
But it will be hard if he was compelled to look up his money indefinitely. If the date of payment passes by, the law allows him to assume that the instrument has been met in the ordinary course, and he is no more liable to it unless he has, in the meantime, received information of dishonour of the instrument. The consequence of omission to give notice of dishonour is to discharge all parties who are entitled to such notice. Unless the holder gives notice of dishonour he cannot enforce his rights against the other parties.
Ans. Mode of Notice : Section 94 provides about the mode of notice of dishonour. Notice may be oral or written or partly oral and partly written. it may be sent by post. The law does not prescribe any specific form of notice. It may be in any form but it must inform the party to whom it is given, either in express terms or by reasonable intendment, that the instrument has been dishonoured, in what way it has been dishonoured, and the person served with the notice will be held liable thereon.
Time limit for notice - It is also necessary that the notice must be given within a reasonable time after dishonour. In determining what is reasonable time for giving notice of dishonour, regard shall be had to the nature of the instrument and the usual course of dealing with respect to similar instruments; and, in calculating such time, public holidays shall be excluded.
Place of notice - The place of business or (in case such party has no place of business) at the residence of his party for whom it is intended, is the place where the notice is to be given. If the person who is to give the notice does not know the address of the person to whom the notice is to be given, he must make reasonable efforts to find the latter's address, but if the party entitled to notice cannot after due search be found notice of dishonour is dispensed with. (Sections 94 and 98(d)).
Ans. When notice of dishonour is unnecessary : In a suit against the drawer or endorser on a dishonoured instrument, notice of dishonour is a material part of the cause of action. Notice, however, can be dispensed with under the several cases mentioned in Section 98 of the Act. Notice of dishonour is unnecessary in following cases :-
(i) When notice expressly waived - Notice of dishonour is dispensed with by express waiver by the party entitled to notice. A waiver of notice may be made before the time for giving notice has arrived or after the omission to give due notice has occurred. [Section 98(a)].
(ii) When the drawer countermands payment - Where the drawer has countermanded payment, he having an impediment in the way of the holder obtaining payment, is not entitled to notice of dishonour. [Section 98(b)].
(iii) When no damage to party charged - When a party charged could not suffer any damage for want of notice, it is not necessary to give him such notice. Neither presentment nor notice of dishonour is necessary if it shown that at the time when the instrument was drawn there were no funds belonging to the drawer in the hands of the drawee. [Section 98(c)].
(iv) When address of the party not known - Ignorance of a party's address excuses want of due notice of dishonour, provided that the holder has used reasonable diligence to find it out. [Section 98(d)].
(v) When omission excused by accident - Omission to give notice of dishonour is also excused when the omission is caused by unavoidable circumstances, such as death, or dangerous illness of the holder or his agent, or other inevitable accident or overwhelming calamity not attributable to default, misconduct or negligence of the party giving notice.
(vi) When one of the drawers is also acceptor - When one of the drawers is also the acceptor, it is not necessary to give them notice of dishonour as the same is known to him. [Section 98(e)].
(vii) When promissory note is not negotiable - When a note is not negotiable its endorsement does not give the endorsee any claim against the maker or endorser. [Section 98(f)].
(viii) When notice impliedly waived - Clause (g) of Section 98 deals with case in which a party entitled to notice under an instrument after dishonour and with full knowledge of the facts promises unconditionally to pay amount due on instrument. [Section 98(g)].
When Party to whom notice given is dead. - Section 97 of the Act lays down that when party to whom notice of dishonour is dispatched is dead, but the party dispatching the notice is ignorant of his death, the notice is sufficient.
Ans. According to Section 99, "When a promissory note or bill of exchange has been dishonoured by non-accepting or non-payment, the holder may cause such dishonour to be noted by a Notary Public upon the instrument, or upon a paper attached thereto, or partly upon each."
In addition to giving notice of dishonour the holder of a dishonoured inland bill may, if he so desires, cause the bill to be noted or protested. Nothing is a step preliminary to protest. The holder may, if he so desires, adopt this method, whereby evidence of dishonour is secured. This is done by "noting". The notary public or his clerk proceeds to make a formal demand upon the drawee or acceptor for acceptance or payment as the case may be, and on refusal "notes" the bill. By noting is meant the minute recorded by a notary public on a dishonoured bill at the time of dishonour. Such noting may be done either upon the instrument or upon a paper attached to it or partly upon each.
It must contain the following particulars :-
(1) The fact of dishonour;
(2) The date of dishonour;
(3) The instrument has not been expressly dishonoured;
(4) If the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonour; and
(5) The Notary's charges.
Noting is not compulsory in the case of an inland bill or note. This depends upon the option of the holder, and omission to do so does not, in any way, affect his rights thereon. Noting should be made by the notary within a reasonable time after dishonour. Noting by itself has no legal effect. It is not evidence of presentment or dishonour of the bill. But the following are some advantages :-(1) Under Section 204-A noting may provisionally serve the purpose of protest which may be drawn up later.
(2) Under Section 108 noting even without protest is sufficient to allow a bill to be accepted for honour.
(3) Similarly, under Section 113 a bill may be paid for honour even after noting though no protest has yet been drawn up.
Ans. According to Section 100, when a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may within a reasonable time, cause such dishonour to be noted and certified by a Notary Public. Such certificate is called a protest.
The protest is the formal notarial certificate attesting the dishonour of the bill, and based upon the noting.
The following are the advantages of a protest :-
(1) It affords authentic and satisfaction evidence of dishonour to a drawer or indorsers living abroad, who would find it difficult to make inquiries of such dishonour, and would be compelled to rely on the representations of the holder.
(2) Under Section 119, in a suit upon a dishonoured instrument, the Court shall on proof of protest, presume the fact of dishonour unless and until such fact is disapproved.
Protest is not compulsory in the case of inland bills, and omission to have an instrument protested does not, in any way, affect the right of the holder thereon. Contents of Protest. - In order that a protest may be valid, it must contain the following particulars :-(1) Instrument or transcript of instrument.
(2) The name of the parties. The protest must mention the name of the party for whom and against whom the instrument has been protested.
(3) The fact and the reasons for dishonour.
(4) Place and time for dishonour.
(5) The signature of the notary.
(6) In the event of an acceptance for honour or of a payment for honour, the name of the person by whom, of the person for whom, and the manner in which, such acceptance or payment was offered and effected must be stated on the protest.
Ans. Notice of Protest. - Notice of protest is a notice of dishonour coupled with intimation that the bill has been protested as required by law.
Notice of protest is necessary to fix the liability of the parties on an instrument which requires to be protested. The drawer and the indorsers require notice in order to protect their own interest just as much when the bill has been protested as when it has not. Where notes and bills are required to be protested, notice of protest must be given instead of notice of dishonour. Such notice of protest, however, must be given by the notary public. The rules as to giving notice of protest are similar to those of notice of dishonour.
Ans. According to Section 104, foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn.
This section requires protest in the case of foreign bills, where such protest is necessary by the law of the place where they are drawn. The effect of this section will be that all bills drawn out of India must be protested because by the law of most countries a protest is made essential in case of dishonour of a bill. But a foreign bill drawn in India need not be protested notwithstanding that protest may be required by the law of the place where the bill is payable. Protest is absolutely necessary in case of foreign bills, and the Courts will not allow any evidence of dishonour except the evidence of protest. But this section does not apply to foreign promissory notes. A bill drawn upon a resident in India is an inland bill for which no protest is necessary.
Ans. In determining what is reasonable time, the nature of the instrument, the usage of trade with regard to similar instruments, and the distance at which persons live from each other should be taken into consideration. In addition to these regard shall be had to the situation and interest of the parties, and the distance between the place where the instrument is made or drawn from that where it is to be accepted or paid. Public holidays should be excluded in calculation of what is reasonable time.
Reasonable time of giving notice of dishonour. - Where the holder of the instrument and the party to whom notice is given carry on business or live in different places, the notice of dishonour must be posted by the next post if there be one of the day, or on the next day after the day of dishonour. But if the parties carry on business or live in the same place, it is sufficient if the notice is despatched so that it reaches its destination on the day next after the day of dishonour.
Reasonable time for transmitting notice. - Where a party receives due notice of dishonour, he has, after the receipt of such notice the same period of time for giving notice to antecedent parties that the holder has after dishonour. Thus, each party is entitled to a clear day for giving notice, and one clear day is to be allowed for each step in the communication, between parties who are liable on the instrument. If, however, the holder or an indorser chooses to give notice to parties, he cannot claim as many days as there are indorsers, but is bound to give notice within the time which he is to give notice to his immediate indorser.
Q. 48. What is meant by acceptance for honour ? What are the liabilities of an acceptor for honour ?
Ans. Acceptance for honour : When a bill of exchange is dishonoured by non-acceptance the credit and honour of the parties thereto, particularly the drawer, is adversely hit. The holder in such a case may bring an action against the parties liable on the bill. Similarly, when the acceptor of a bill of exchange has become insolvent or his credit has been publicly impeached the holder would feel insecure. In order to save the credit and honour of such parties such a bill can be accepted for honour. When a bill of exchange has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the honour of any party thereto (Section 108).
The following are the conditions for a valid acceptance of honour :
(1) Before there can be acceptance for honour it is essential that the bill of exchange must have been noted or protested for non-acceptance or for better security.
(2) Acceptance for honour can be made by any person who is not a party already liable on the bill. Such an acceptance can be made only by a stranger.
(3) Acceptance for honour should be made in writing on the bill.
(4) Acceptance for honour should be made with the consent of the holder. If the holder does not want, such an acceptance cannot be made.
(5) The acceptance for honour may be made for the honour of any party already liable on the bill. A person desiring to accept for honour must, by writing on the bill under his hand, declare that he accepts under protest the protested bill for the honour of the drawer or of a particular indorser whom he names, or generally for honour (Section 109). Where the acceptance does not mention for whose honour it is made it shall be deemed to be made for the honour of the drawer. (Section 10).
Rights and liabilities of acceptor for honour - The liability of the acceptor for honour is conditional and arises if the original drawee, after being approached again on the date of the maturity, does not pay. An acceptor for honour cannot be charged unless the bill has, at its maturity, been presented for such dishonour. (Section 112). As regards rights and liabilities, an acceptor for honour takes the place of the person for whose honour he has accepted the bill. On such acceptance the acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not. (Section 111). On paying the bill, an acceptor for honour is entitled to recover the amount from the person for whose honour he accepted the bill and all prior parties to such a person. But an acceptor is not liable to the holder of the bill unless it is presented or (in case the address given by such acceptor on the bill is a place other than the place where the bill is made payable) forwarded for presentment not later than the day next after the day of its maturity. (Section 111).
Ans. As a general rule no one can make any payment voluntarily on behalf of somebody else and then claim the amount from the person on whose behalf payment was made. Section 113, Negotiable Instruments Act, however, permits payment being made by one person on behalf, and for the honour, of another person. The section reads as follows :
"When a bill of exchange has been noted or protested for non-payment, any person may pay the same for the honour of any party liable to pay the same : provided that the person so paying or his agent in that behalf has previously declared before a notary public the party for whose honour he pays and that such declaration has been recorded by such notary public."
The payment for honour is made only of a bill of exchange. For a valid payment for honour the following essentials are to be satisfied :
(1) The bill of exchange must have been dishonoured by non- payment and then noted and protested for the same.
(2) Such payment must have been made for the honour of any party liable to pay the same.
(3) The person making the payment or his agent must declare before the notary public the party for whose honour he pays, and that such declaration must have been noted by such notary public.
Any person so paying is entitled to all the rights, in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment (Section 114).
Ans. According to section 115, where a drawee in case of need is named in a bill of exchange, or in any instrument thereon, the bill is not dishonoured until it has been dishonoured by such drawee. Where a drawee, in case of need, is mentioned in a bill of exchange, it is obligatory on the holder to present the instrument to him and it is not considered to be dishonoured unless and until it has been dishonoured by such drawee.
The non-presentment of the bill to the drawee in case of need absolves the drawer from liability. Where a bill of exchange is duly accepted by, but dishonoured when presented for payment to the drawee in the first instance, it cannot be validly presented for payment to the drawee in case of need if it was not first presented to him for acceptance.
But a drawee in case of need may accept and pay the bill of exchange without previous protest.
Ans. Special rules of evidence : Sections 118 and 119 lay down the following presumptions in case of negotiable instruments. The presumptions are, however, rebuttable :
(1) Presumption as to consideration [Section 118(a)] : In case of negotiable instrument the plaintiff has not to show that he had received the same for consideration. On the other hand it is presumed that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred for consideration. In case of ordinary contracts no such presumption is raised and the burden is on the party enforcing the contract to prove the presence of consideration. In case of negotiable instruments consideration is presumed to be there until the contrary is proved (V.O. Devassy v. Periyar Credits, AIR 1994 Ker. 405). Thus, in case of a negotiable instrument the defendant could avoid the liability by proving that he became a party to the same without consideration (K.P.O. Moideen Kutti Haji v. P. Mangooran, AIR 1996 SC 3356).
When a suit for the recovery of amount is brought on the basis of a promissory note and the defendant denies the execution of the promissory note by pleading that he had put his signature or thumb impression on blank paper, the plaintiff has to prove the execution of the promissory note by the defendant, and thereafter the presumption arises that there was consideration, and the defendant can rebut the presumption either by direct evidence or circumstantial evidence (K. Ray v. U. Panda, AIR 1991 Ori. 25).
(2) Presumption as to date (Section 118(b)). - In case of a negotiable instrument bearing a certain date there is presumption that it was made or drawn on such date.
(3) Presumption as to the time of acceptance (Section 118(c)). - In case of an accepted bill of exchange the presumption is that the same was accepted within a reasonable time after its date and before its maturity.
(4) Presumption as to time to transfer (Section 118(d)). - It is presumed that every transfer of a negotiable instrument was made before its maturity.
(5) Presumption as to order of indorsements (Section 118(e)). - The presumption is that the indorsements appearing upon a negotiable instrument were made in the order in which they appear thereon.
(6) Presumption as to stamp (Section 118(f)). - There is presumption that a lost promissory note, bill of exchange or cheque was duly stamped.
(7) Presumption that the holder is a holder in due course (Section 118(g)). - The presumption is that every holder is a holder in due course. Thus, every holder is presumed to have taken a negotiable instrument in good faith and for consideration. The opposite party has to prove that the holder is not a holder in due course as one or the other essentials of a holder in due course mentioned in section 9 are absent.
(8) Presumption on proof of protest (Section 119). - In a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disapproved.
Ans. Sections 120 to 122 deal with the estoppels created by the Negotiable Instruments Act.
Estoppel against maker, drawer and acceptor for honour of the drawer. - No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn.
Estoppel against maker and acceptor. - No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee's capacity at the date of the note or bill, to indorse the same.
Estoppel against indorser. - No indorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract any prior party to the instrument.
Ans. According to Section 87 of the Act if a holder makes material alteration in a negotiable instrument, he loses his right of action against those who were liable to him but Section 87 is subject to the provisions of Section 125 which permit the holder to cross a cheque.
General crossing - According to Section 123, where a cheque bears across its face an addition of words "and company" or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply either with or without the words "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.
General crossing, therefore, consists in drawing of two parallel transverse lines on the face of the cheque. Sometimes in addition to these two lines the words "and company" or "not negotiable" may also be added. Such crossing also is a general crossing. Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker (Section 126). It means that the drawee bank is not to make the payment of the cheque at the counter but the payment is to be made only to another bank who collects the cheque on behalf of the holder. In case of general crossing, therefore, the holder may get the cheque collected through some bank.
Special crossing - According to Section 124, where a cheque bears across its face an addition the name of a banker, either with or without the words "not negotiable" that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.
Special crossing consists in writing the name of some Bank across the face of the cheque. For example, if a cheque, has been drawn on State Bank of India and across its face the holder writes Punjab National Bank, the cheque is deemed to be crossed specially, and it is crossed specially to the Punjab National Bank.
Special crossing can only be made in the name of one banker. According to Section 127, where a cheque is crossed specially to more than one bankers, the banker on whom it is drawn shall refuse payment thereof. There is, however, one exception to this rule and that is that bank to whom it has been specially crossed may make another special crossing in the name of another bank so that the latter may collect as an agent for the former bank.
"Account Payee" Crossing - Sometimes along the crossing of a cheque the words "A/C Payee" or "A/C Payee only" may be written. The effect of such words is that the collecting bank is supposed to collect the cheque only on the behalf of the payee. If the collecting bank collects it on behalf of some other person it can be held responsible for the same. The object of adding these words in the crossing is to give protection to the payee.
Who may cross a cheque ? - A cheque may be crossed either by the drawer or by the holder. Section 125 permits the crossing being made in the following ways by the holder :-
(i) Where a cheque is uncrossed, the holder may cross it generally or specially.
(ii) Where a cheque is crossed generally the holder may cross it specially.
(iii) Where a cheque is crossed generally or specially the holder may add the words "not negotiable".
The Banker also is entitled to cross a cheque in the name of another bank who may collect the cheque as an agent for collection. Therefore, where a cheque is crossed specially, the banker to whom it is crossed may cross it specially to another banker, his agent for collection. (Section 127). Protection to the collecting bank - Section 131 of the Act grants a protection to the collecting bank. If the collecting bank has collected a cheque satisfying the conditions which are mentioned in Section 131, then it cannot be held liable even if the amount is collected on behalf of a person who is not the true owner. In order to avail of such a protection the banker has to prove the following :-(i) That the banker had received the payment of a crossed cheque. It means that the cheque which is to collect must have been given to the banker as crossed i.e., which was crossed either generally or specially to that banker before it reached the hands of the collecting bank.
(ii) That the collection was made by the bank on behalf of a customer.
(iii) The collecting bank must have acted in good faith and without negligence in collecting the amount due on the cheque.
In Syndicate Bank v. Jayshree Industries, AIR 1994 Kant 315, a draft in the name of `Ms. Rama' was collected and credited to the account of `Mr. Rama', the bank was held to be negligent and thus not entitled to protection given under Section 131, N.I. Act. It is no defence that the bank acted in good faith.
Ans. Rules of International Law : The Negotiable Instruments Act provides the following rules in the case of such instruments where the parties are in different countries :-
(1) In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place where the instrument is made payable (Section 134).
For example, a bill of exchange was drawn by A in California, where the rate of interest is 25 per cent and accepted by B, payable in Washington, where the rate of interest is 6 per cent. The bill is indorsed in India, and is dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate of 6 per cent only; but, if A is charged as drawer, A is liable to pay interest at the rate of 25 per cent.
(2) Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or indorsed the law of the place where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient (Section 135).
(3) If a negotiable instrument is made, drawn, accepted or indorsed out of India, but in accordance with the law of India, the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country where it was entered into does not invalidate any subsequent acceptance or indorsement made thereon in India (Section 136).
(4) The law of any foreign country regarding promissory notes, bills of exchange and cheques shall be presumed to be the same as that of India, unless and until the contrary is proved (Section 137).